Playing the Nuclear Card

The Daya Bay nuclear plant, partly owned by CLP, supplies Hong Kong and southern China with much of their electricity
Photo: CLP Holdings

By

David Winning

Updated Nov. 29, 2010 12:01 a.m. ET

Coal is still king in China's energy sector, and will be for years. But Beijing is laying the groundwork for nuclear and renewable energy to play a much bigger role—and no company illustrates that shift better than Hong Kong's biggest utility,
CLP Holdings
Ltd.

CLP, one of the biggest foreign investors in the mainland's power sector, says it no longer will build coal-fired plants in China. It will continue to expand capacity at its existing Chinese coal plants. But the company's new construction and other investment for the future in China will focus more on nuclear and renewable energy.

CLP's strategy—part of a larger shift to raise the company's noncarbon-based sources of energy to as much as 40% of generating capacity by 2020, up from a current 19%—coincides with Chinese government subsidies and policies favoring cleaner sources of power. Among them: Giving noncoal power sources priority access to the increasingly overburdened grid.

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Burning coal has made cities like Shanghai among the smoggiest in the world, and China a target of climate-change activists everywhere. But the policy shift to cleaner energy is also a response to market forces: higher coal costs, low uranium prices, and the falling expense of building nuclear plants.

"There's a myth that nuclear is expensive," says
Andrew Brandler,
CLP's chief executive. "If you standardize the design of reactors and mass-produce, then you can bring the cost down pretty dramatically. And that includes setting aside provisions for decommissioning and dealing with the spent fuel."

Slow Burn

The transition is likely to take decades. With coal supplying two-thirds of the country's electricity, China has resisted international treaties that would impose caps on its carbon emissions. But relying too much on coal takes a toll on the country's growth as well. Indeed, despite a surge in local coal prices in recent years, Beijing has held down power rates to fight inflation. As a result, many coal-fired plants now operate at a loss.

ENLARGE

Adding to coal's woes, among the policies and incentives the government has enacted to encourage rapid development of nuclear and renewable energy is a requirement that state-owned grid companies buy all of the electricity generated by nuclear and renewable sources, even when it costs more than electricity from coal-fired plants.

CLP is making its play through longtime partner China Guangdong Nuclear Power Co., one of three state-owned groups that run and develop nuclear power plants in China. The two have a wind-energy joint venture with a planned total of 1.77 gigawatts in capacity, but mostly they own and operate nuclear reactors in China's south. CLP owns 25% of China Guangdong's Daya Bay plant and expects by early next year to acquire a 17% stake—valued at roughly US$500 million—in a new China Guangdong plant about 140 miles west of Hong Kong. The two companies also recently joined talks about co-investing in a new nuclear plant to supply Hong Kong, where the government has discussed more than doubling nuclear's share of local electricity needs to 50% by 2020.

A recent study by CLSA Asia-Pacific Markets predicts that nuclear will see the fastest growth in terms of China's power generation over the next few decades. Nuclear plants can operate at stable rates year-round, while noncarbon energy sources such as wind farms and solar panels depend on the weather to generate power. Coal's share of overall power generation, meanwhile, will shrink to 63% by 2020 and 51% by 2030, the study contends, down from 78% this year.

But there's another force favoring nuclear as well: low uranium prices. The spot price for U308, a common compound of uranium, currently stands at around $60 a pound—down from a record $138 in 2007.

Profit Calculations

Big risks remain for China's alternative-energy sector. The government sets prices for nuclear power on a project-by-project basis, for example, which forces investors to decide whether to build a plant without knowing the price that its output will fetch. Also, with inflation running at 4.4%, Beijing is reluctant to grant price increases for generators of any kind of power.

But CLP's Mr. Brandler, for one, is confident that his company's noncoal investments will be profitable. The Chinese have standardized the design of nuclear reactors in use in Guangdong, he says, and most of the components are made locally. For a new plant, he estimates the cost per kilowatt of nuclear capacity in China to be $1,500 to $2,000, compared with $4,000 to $6,000 in the U.S.

"Put all that together and run the numbers," he says, "and these projects [in China] will produce power including a reasonable profit margin at a tariff a lot lower than conventional coal in Guangdong."

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